A Fed poll

Well, that was...exciting. The long-awaited return of volatility has arrived with quite a fanfare (or is that a requiem?), with yesterday's whip-saw price action unlike anything observed since the US downgrade furore in 2011.

How crazy was it? Macro Man got one of those "eurodollars screaming higher, no offers in sight" texts from one of his brokers yesterday morning, even though neither of us are currently in a seat. One can only presume that plenty of punters who are in seats got similar messages, if not shoulder taps from risk managers.

Indeed, the late-session selling that has characterized so much of this "meltdown" in stocks is highly symptomatic of both margin call-related selling and rebalancing from the uber-leveraged-ETF-that-separates-the-public-from-their-money crowd.

Macro Man was intrigued to see the VIX print 30 yesterday as Spooz shanked 3%; in the good old days before the GFC, 30 was usually a good bellwether for at least a short term bottom. Sure enough, stocks did rally sharply thereafter, though the above-noted factors knocked them off of their intraday high.

A key question for many investors, macro or otherwise, is how or if the Fed will react to recent developments. On the face of it, it's frankly absurd to even raise the question. A 10% sell-off in equities is hardly outside of the realm of normality, and most forecasters still expect US growth of something close to 3% in the second half of this year, with ongoing improvement in the labor market. The downdraft in energy prices is bad for those involved in its extraction and distribution but good for everyone else; as Polemic has noted in the comments recently, the magnitude of the recent sell-off is more consistent with a purging of financial excess than a reassessment of the fundamentals.

And yet......this is the same central bank that pushed through an intra-meeting cut because of a French rogue trader in early 2008. The same CB that likes to reference 5y5y breakevens when they tank (even though a prime driver of the pricing of inflation bonds is energy, which the Fed strips out of its own inflation targets.) The CB that has reminded us ad nauseum that asset purchases are not on a pre-set path, and that the pace of QE can go up as well as down.

Macro Man isn't naive enough to suggest that yesterday's fixed income melt-up was the result of a sober re-assessment of the likely trajectory of Fed policy. It wasn't. And yet, for yields to stay here for any meaningful period of time, it will likely require just such a re-assessment. An obvious catalyst would be for the Fed to shake up the market's (erstwhile) perception that monetary policy is entering a quiet period on auto-pilot while the FOMC girds its courage to actually start tightening. What better way to shake up that lazy view (and to show the equity guys that Janet's got your back) than by not ending the taper in a couple of weeks, but extending it through then end of the year?

What do you think? The blog traffic-o-meter has gone shooting higher over the last couple of days, which is usually a great sign that something has gone horribly wrong somewhere. Please respond to the poll below to help us gauge whether the expectations for the Fed have shifted....or just the price of fixed income.

C Says,I have to say I find it amusing every time someone uses the word "artificially" in the sense of analysing asset value. Exactly, what is "artificial" about a designated institution implementing policy that is goal driven? Exactly, what is unusual about such a concept given that it happens continuously?Yes, such policy certainly shapes behaviour ,that's why they use it! It isn't however artificial at all.No, the reality is behaviour that identifies the policy goals and acts accordingly is completely rational as oppose to artificial. What is not rational per se is that the system also provides has much margin to leverage that behaviour as it does. I make my returns year in year out without leverage. Leverage is only required because we have a system that includes intermediaries who couldn't function ,or indeed have a reason for being were leverage not to exist as it does.

Nico,I hit reset as well. Approximately a 10% correction phase and though it could waterfall a la 1987 that still isn't the probability play.

Even if we had expected the Fed and BoE to start considering hikes for next year, Economic data the world over are showing weakness pushing rate hikes to never. We will always find a reason not to hike.

Trick is that the CB role has become too political and as with any subsidy, it's easy to give but hard to take back.Travis

Analysis, concur with Pol but don't think this is the spot to jump in.

While I don't think the Yennish fatigue top is in, I rate that 50/50. I have however watched carefully how the dips (Yes, they could be seen on the hourly chart!) were bought after the S&P500 made all new highs and it didn't have the same resemblance as 2011 and 2012.I'm going to extrapolate this to how we bottom in the short term too.As for the FOMC..don't care, I'm too busy getting pissed and eating meat pies at races! Sidenote: This trader is not very technical these days..no Bloomberg here, and can't see myself ever having one.

C Says,Pol,"Problem that folks are experiencing is that the rules set by the rule makers are not clear"That is exactly the opposite of what I hold to be true. Policy makers I suspect spend too much time trying to work out what the market wishes to hear in order to get them on side. The problem with that is the very success of it holds within it it's own failure. The unescapable fact is when policymakers are what is laughably known has transparent what it leads to is the crowded trade syndrome based typically upon ludicrous leverage. Thereafter that overall position depends solely on everyone carrying agreeing and when they stop and the volatility of disagreement rises as it is now doing we see the result. Summarise that this way, transparent policy that leads to long periods of stability with inevitably lead to instability. Psychologically it can't be any other way.

C.. I don't disagree as I think the case you make can be covered within what i said.

"Thereafter that overall position depends solely on everyone carrying agreeing and when they stop and the volatility of disagreement rises as it is now doing we see the result.

Isn't that disagreement the result of unclear policy? If it was totally clear they'd be no disagreement.

Eg. ad absurdum - Italian lira is pegged to DEM via Euro.. very very clear. no disruption of markets - until it aint clear.

Most of the debate in recent MM posts has been around Fed policy. The very fact that the poll above gives different results is testament to that fact that policy is unclear and hence we get the swings in guesswork and it's those swings in guesswork that cause the unruly behaviour. .

C SaysPol, No we're not really saying the same thing. What I am saying is the market wants not just transparency it also want more precision than policy makers can possibly deliver. When I say markets I'm not talking about your average Joe Public I'm talking about those entities who are so leveraged that any necessary change in expectations makes it impossible for them to hold.

Precision is a subset of transparency in this case then. Noted. And agree that transparency is useless if they transparently stay opaque with the precision.

the leverage issue i surely just an example of having your stops within the envelope of expectations of what is normal ( i.e. leads to disaster). And you are saying that the interpretation of normal is is assumed to be tighter than it is in reality because policy makers aren't precise enough in saying anything.

Or basically -- give a market an inch it will take a leveraged mile? ( agree)

Um Fed?! The Prob is the ECB was supposed to pick up the bAton and they've announced they're going to wait for the r the results of their abs program before doing anythg. By then they will get the most bang for their buck as the market will have had a decent correction. Short term bottom seems in place but I'm watching oil for the all clear.

C SaysWhen you think about it this issue is a form of Soros's much discussed Reflexivity. Policy tries to influence the market risk takers and they in turn perform in way which feeds back to the policy makers who then have to find a way of adapting their policy to the unexpected element of the risk takers behaviour. So we could say they are being has transparent has that process allows and the lack of precision is inherent in policy in that it cannot foretell what the market response is going to be until it has happened. Just a way of saying what goes around comes around ;)

C SaysHaving reset I find time to read a little more about this Ebola situation. I struggle to find words suitable to describe how this is being handled so I have to fall back on my patented standby "fuckwits par excellence"!That the people who should be controlling the flow on this think it's ok for someone infected to come into a 'general' hospital enviroment is clueless beyond belief. I happen to have the benefit of the inside track on issues like this has my wife has got 35 years of relevant experience to educate me with.If they want to play russian roulette bringing any person known to be infected back from the point of origin it should be printed in capital letters a mile high that they can only come to one of the very very few centres that are trained and equipped to handle it. There should be no alternatives ,no stop offs. The average nurse even with some basic training wouldn't be up to dealing with this issue. Next time you are in hospital I suggest you just closely watch the staff and how they automatically use their hands without thought sometimes. Afterwards you won't be surprised that some nurses managed to become infected. Staff who do this job must absolutely be anal retentives !

And C, the next point to worry about is that the UK Govn crow about the 'centre of excellence' for coping with Ebola in the UK is The Royal Free which is nicely located in the midst of dense housing only because they merged with the old infectious diseases hospital of Coppetts Wood, which was more sensibly an isolation hospital near Muswell Hill. But the point is - how many beds does the Royal Free have capable of coping with Ebola ?

Fed will continue with their planned taper/end of QE. Dot plots might shift with data, but isn't that what they've said all along? Low-rate low-vol is creating spasms of vol in higher-leveraged crowded trades, but its not changing the landscape enough to warrant policy shift.

USD is still the cleanest dirty shirt. Rates are going nowhere. Crude is gonna find support.

C SaysPol,The reality is our ability to cope with Ebola is extremely limited by numbers. On a very small scale it can be done. Which is why it so important that their first duty is keep those numbers small. If they ever really escalate so that we have to bring into play non-specialty hospitals then we are done. That's the annoying part of what has been happening so far. They don't seem to appreciate the necessity for putting controls on this flow that lock it down. Spanish and US so far have cocked it up badly. We can only hope that they have identified what they have done wrong so far and don't repeat it.

While a capitulation day is always 'fun' to trade, the sheer brutality of recent moves underlines how worryingly little risk appetite dealers have in this day and age. If we get some half hearted effort from the ECB a downshift into a low liquidity environment will bring more and more of these moves.

I had to rub my eyes yesterday as ED greens posted 45 odd bps on the day and much the same movement in BTP/Bund this morning. When the capitulation hits the market, there is almost no where to hide.

Polemic:The ball is in Team Mario's court - if we don't get sovereign QE in any meaningful form sooner rather than later (November meeting), the combination of inflation data with almost every other forward looking metric in Europe poses awkward questions for Italy et al's debt sustainability, so I don't think it's completely unwarranted to go back to the 2011 playbook. The longer the ECB wait, the more 'squeaky bum time' the market will endure, in my opinion.

LB isn't in panic mode b/c of Europe, Ebola or fear of deflation, but has a few thoughts to offer on the CDC and its inept handling of the Ebola virus based on some professional knowledge. Must apologize for the length of this - but it is detailed, although not technical.

The general approach to Ebola taken in the US to date seems to be based on the model used successfully for HIV, which is a typical blood/semen-borne virus. With HIV, if you don't share needles, have sex or exchange bodily fluids you are going to be OK, b/c these are the only media that carry a high titre of the virus. This analysis means as long as you don't have open skin wounds or encounter blood in some other way, not much to worry about. As we all know, this held up well for HIV, which is a virus with little ability to survive outside the body or associated fluids.

At another extreme, influenza virus is known to be present in the upper respiratory tract and to be released in secretions caused by the death of cells in the lining of the lungs and trachea. These are present in the air when the patient coughs, and can remain viable for many hours on surfaces. Most flu viruses are not that virulent, but it isn't hard to understand why the Spanish flu of 1918 managed to infect and kill millions of people in one great pandemic, as the strain hadn't appeared for many years and most people lacked immunity.

Now, Ebola. It is a hemorrhagic virus that kills people fairly quickly in the village in West Africa, but usually the outbreaks are self-limiting as few people are close to the patient. In the larger cities such as Monrovia, however, conditions resemble those associated with other plagues in history. Crowding and poor sanitation. It is assumed that contact with blood and feces spreads disease. Urine is possibly safe, b/c of the filtering by the intact kidney. Sweat has not received much attention.

Let's move to the hospital in Dallas. An over-confident hospital treats Ebola a bit like HIV. No full body suits. An inadequate plan to handle blood and waste, and most probably of critical importance, no removal and filtering of air from within the patient care area, because we have been told the virus "isn't airborne", like influenza, which is true to a limited extent. But let's use our brains, and realize that these labels aren't absolute.

Now, imagine you have a patient very ill with Ebola and a high fever of 102. Humans sweat. All the time. This patient is sweating copiously, as the sweat glands attempt to cool the body, even as the immune system attempts to deal with rapid viral replication. Blood titre of virus rises dramatically as death nears, and as the sweat glands are very well vascularized, the virus is exuded onto the skin in sweat, which is then shed into the air as an aerosol of microscopic droplets, which can likely spread over a radius of 6-12 feet depending on air flow. These are then inhaled by mouth by the unlucky nurses who lack proper suits and are in an area that isn't appropriately ventilated. This didn't have to happen if the hospital wasn't negligent.

No more patients in community hospitals please, we need people with at least three figure IQs to deal with this problem. Send them to NIH.

Now, the people on the plane with the nurse are unlikely to have been exposed to aerosols with a high titre of virus. Probably OK, but monitor them carefully now please, stop flights into Canada, US and Mexico from Liberia and CLOSE THE AIRPORTS in West Africa except for military planes bringing in medical personnel and other material aid.

These aren't panic measures. Just solid public health practice and common sense. This won't last long if we do the right thing and use our brains.

Full body suits and a decontamination shower room on the way out is what is needed to contain this here. We know how to do this, just need to get it together. No more complacency and stupidity please. This is what it looks like when a society doesn't get it right early on:

Next stop the 200 day at SPX 1910, then a bit more vol until the 27th/Halloween, followed by a quiet period of backing and filling into Thanksgiving? FX volatility seems to be decreasing for the time being.

When do we get the next verbal description of Dr Aghi's magnificent bazooka (the one that is never seen or used, but merely hinted at, with barely veiled allusions to its massive size)?

This could be a tricky month for fixed income, might be a good time to sit on one's arse and collect some dividends while hedging f/i exposure. Wednesday had all the usual hallmarks of a blow-off top. Slow drift in yields ahead.

A long day ahead for Mr Shorty. Predictable enough. Some European markets are having a +3.0% up day, but as Ritholtz used to observe in '08, this usually only happens in bear markets, almost always denotes a short squeeze and is not a feature of healthy bull markets. Spoos can easily tack on another 15-20 points today, but is this a Dip to Buy, or a Rip to Sell?

Hmm... anyone have any idea when bonds are going to be a buy again? Not for a while, by the look of this price action.

Oh yes, typical expiration nonsense today. Noted. SPX 1900 area rejected at the first time of asking but there will be more attempts. We are back to higher highs and higher lows, at least for the time being. SPX 1905 is where the May low and the August high meet, close to the 200dma, so this area looks like a chart magnet for now.

The 30y was a buy at 3.00% this morning after it filled the gap from the Wednesday plunge, so it's roughly a range trade between 2.70% and 3.00% for the time being.

A half decade and the S&P has tripled off its lows; but the daily gruel of the American worker has thinned with no significant advancement in real income in two decades; one can imagine an inverse decoupling of the equity market from GDP: equities enter a long protracted descent w/ $ strengthening and a general retooling of the American base in the fashion of 1815-1905; unless long DuPont, Sears or P&G, equities were no refuge in that era, some bonds fared well BNSF, UP, CP, UST, no understand why no 40 year UST.

A slow squeeze continues.... 1910-1915 area is the next target for SPX, that's the 200 day. A trip to the 1950-1960 area (50 day) can't be ruled out, either. Mr Market likes to mess with people. One bearish observation on the day is that The Carry Monkey doesn't seem to be on board, USDJPY is red, in the absence of US data today.

A lot now depends on government response to the latest outbreak of the dreaded EUROLA virus, with all of its deflationary dangers, especially for the periphery. Dr Aghi is searching for a cure, believing that its origins lie in Frankfurt, somewhere deep within the jungle known as the Buba, where Jens Wiedmann is known to fancy a fruit bat Wurst from time to time.

John 3:18 AM "the daily gruel of the American worker has thinned with no significant advancement in real income in two decades"

Charles Murray saw this coming back in 1994 in his book, " The Bell Curve ":

"Predicting the course of society is chancy, but certain tendencies seem strong enough to worry about:

An increasingly isolated cognitive elite. A merging of the cognitive elite with the affluent. A deteriorating quality of life for people at the bottom end of the cognitive distribution.

Unchecked, these trends will lead the U.S. toward something resembling a caste society, with the underclass mired ever more firmly at the bottom and the cognitive elite ever more firmly anchored at the top, restructuring the rules of society so that it becomes harder and harder for them to lose. (p. 509)"